Roman Frydman and Michael D. Goldberg
By Arnold Kling
The book is Beyond Mechanical Markets: Asset Price Swings, Risk, and the Role of the State, and I have written an essay about it.
Frydman and Goldberg say that the existence of asset price swings contradicts previous theories of financial markets. For example, the Efficient Markets Hypothesis, in its strongest form, holds that market prices always reflect fundamentals. If this were true, then we should only observe normal noise or minor drift.
The essay leaves out the parts of the book that I found most interesting. The authors delve into some fundamental problems with financial models that assume a “representative agent.” Instead, they stress the importance of people having different information sets and models. On this issue, I am very much in agreement with them. I believe also that the “representative agent” approach is a big part of what is wrong with standard macroeconomics.
I did not stress this aspect of the book in my essay, because I would have had to write for a purely academic audience. Also, although I think that their criticisms of the standard paradigm sometimes hit the mark, I did not find their solution entirely compelling. For example, it is frustratingly vague to say, as the authors do several times, that people “revise their forecasting strategies in guardedly moderate ways.”